$$$ KPO and CZM $$$: Soilbuild Business Space REIT (Not) Bad Preferential Offering

Wednesday, September 4, 2019

Soilbuild Business Space REIT (Not) Bad Preferential Offering

I received an SMS earlier today from SCB - corporate action.

The first thing that came to mind was will this be dilutive or accretive? You should be able to guess it from the title of my post. To be honest, I have not been keeping up with the market news so this is new to me. Went to dig through the announcement and wanted to do a quick summary.

Soilbuild REIT will be acquiring a new Grade A office building in Australia - 25 Grenfell Street, Adelaide for A$134.22 million (S$127.51 million) but will be paying approximately A$142.01 million (S$134.91 million) due to various fees, out of which S$101.8 million will be raised through this preferential offering.
Every 18 New Units will be issued for every 100 existing units in Soilbuild REIT (the “Units”) held as at 5.00 p.m. on Thursday, 29 August 2019 to Eligible Unitholders (as defined herein) (fractions of a New Unit to be disregarded) at an issue price of S$0.530 per New Unit.

Let's take a look at the illustrated Pro Forma DPU and NAV. Focus on Scenario B and also note that these are illustrated numbers assuming acquisition happened in 2018.

Decreased in DPU.

Decreased in NAV. Only OUE REIT can do better worst? If we were to look passed the DPU and NAV dilution, this may actually be a decent/good move for Soilbuild REIT...

Let's face it, Soilbuild REIT's DPU has been declining over the years after facing a few defaults (NK Ingredients and Technics Oil and Gas), decreased occupancy and negative rental reversions. As a result, this preferential offering has minimum damage but actually improves its portfolio (out of Singapore + Grade A office building vs its existing industrial buildings).

In my 5 minutes researching time, I believe Soilbuild did not overpay for the building. Credit Suisse put it up for sale earlier this year and it was speculated to be worth as much as A$150 million - Credit Suisse to check out of Adelaide tower.

Their latest 1H financial results are already showing clear signs of declining DPU by another ~10%. Assuming we extrapolate the DPU for FY 2019, it will be 4.628. At an issue price of $0.53, that translates to 8.7% dividend yield for an existing shareholder. If you choose not to subscribe, you will just be diluted and since this is a non-renounceable offering, you cannot even sell the rights. In another word, you are stuck. Just exercise it :)

On the bright side, depending on your entry/average price, this may not be a bad offer for you. In my case, my average price was very high ($0.701) and it became accretive if the calculations are based on cost/average price. Needless to say, I will exercise all of them and apply in excess!

You can use my google spreadsheet/calculator to see how would this rights issue work out for you - KPO Rights Issue Calculator

Fun fact: Soilbuild REIT is buying the building from Credit Suisse who bought the at A$125 million in 2016. They made A$9 million in just 3 years!

25 Grenfell St, Adelaide CBD, sells for $125 million to Credit Suisse

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  1. Thanks. When will the subscription start? I have not received any letter.

    1. Hey David,

      The subscription started on 3rd Sept and will end on 11th Sept - https://links.sgx.com/FileOpen/Despatch%20of%20Instructions%20Bk%20Ann.ashx?App=Announcement&FileID=577168

      If yours is in custodian account like SCB, there is a different deadline which is usually earlier...